Friday, March 24, 2006

The importance of adjusting for inflation in comparing today to yesterday

Since the value of the dollar is the measurement of everything from GDP to revenues and outlays, adjusting for inflation is the only way to understand the real growth of government. In simplest terms, if you adjust for inflation and then for population growth, the result should reflect the actual growth or reduction in growth of government. Given the US population in 1980 of ~230 million and today's ~300 million, one could justify a growth of government to support additional Americans, albiet some of this growth can be attributed to illegal immigration. So after inflation, growth of government of 30% for population growth would be reasonable, but what is the actual growth of the federal government?

First something about the numbers provided by the government. If they are not adjusted for inflation, they cannot be compared to other years. The affect of inflation on us is not trivial. For example, $100 dollars today buys only what $37 would have purchased in 1980. So if it takes nearly $3 to buy what $1 did in 1980, then to compare anything today to 1980, the numbers must be adjusted for inflation so they can be compared. In another example, my entry-level job in 1984 would have to offer double that salary today to be equal to what I earned 22 years ago.

First let's look at the GDP growth rates for the last 4 administrations (adjusted for inflation):

(1982-1989*)
GDP increased under Ronald Reagan at a 3.4% annual growth rate.
(1990-1993*)
GDP increased under George H. W. Bush 41 at a pathetic 0.6% annual growth rate.
(1994-2001*)
GDP increased under Bill Clinton at a 2.7% annual growth rate.
(2002-2005*)
GDP increased under George W. Bush at a 2.95% annual growth rate.
*Dates reflect periods impacted by economic policies.

So now let's consider what the government is spending today versus the growth rate of the US GDP.

After adjusting for inflation, the Gross Domestic Product in the US has increased 77% since 1980. In unadjusted dollars it looks far more impressive at around 360%, but that's not a realistic comparison. Today's dollar is only worth 37% of what the 1980 dollar was worth.

So in 25 years GDP is up 77%, well outpacing population growth by 47%. Thats great news about our economy.

In the same 25 years Social Spending is up 102%, and its growth rate is increasing. Social Spending growth has also outpaced population growth by 72%. That's bad news and getting worse every year.

National Defense has increased only 49%
, or well below the rate of GDP growth, while it has outpaced population growth by 19% during the same period. But given that we are at war against terrorism and trying to make up for decades of ignoring our security, I have no complaints that Bush is spending now to protect us and our children.

Physical investment in transportation, Energy, natural resources and the environment, as well as community and regional development is down
compared to 1980. Here is one of the consequences of social spending growth; no money to build anything like we once did. The crisis in transportation in Western Washington can be directly linked to the federal government's shifting of dollars away from physical investment to social investment.

And then, just when you might say, "this isn't so bad", here is the future Democrats are fighting to preserve with no trust funds available to make up even a portion of the gap when outlays exceed revenues in 2015:



If you can't read those numbers in the chart? They show a $26 TRILLION shortfall for Social Security and a whopping $41.3 TRILLION deficit for Medicare Part A between now and 2080. Also note that while both programs go into the Red in around 2015, those empty trust funds will be exposed for the empty buckets of nothing that they are. But by then the trillions stolen and spent on other government spending will be gone with nothing else to make up the shortfall.

So I'll raise the question posed in an earlier post again. Are the Democrats refusing to reform social spending for purely political reasons, or along with many Republicans do both parties acknowledge in secret that nothing can be done to avoid this train wreck?

3 comments:

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Anonymous said...

Nice article on the numbers of the last few decades. This article however doesn't address the deregulation policies of the 70's and 80's and subsequent transferrance of American's production capacity to foreign countries and impact on what the GDP is today as opposed to what that GDP could have been.
The US spends more than every other industrialized nation plus on Defense spending including China and Russia. Our defense spending is driven by the influence of the military industrial complex as warned by Eisenhower in his farewell address, not by true need. Much of our defense budget is truly wasted and this is an argument best saved for another article.
However, given that the dollar is 3 to 1 compared to the 1980's that would mean that Reagan's 750 Billion stimulus would be 2.25 Trillion in real dollars today. You failed to mention this little tidbit.